The Agenda

Older Workers and the Weak Labor Market Recovery

Stephen Bronars offers thoughts on the weak U.S. labor market recovery. In a guest post at Modeled Behavior, Bronars explained why instead of using the employment rate of adults aged 25 to 54 to gauge the health of the labor market, we ought to use the full-time equivalent (FTE) employment to population ratio relative to trend:

First, adults age 25 to 54 now represent only about half the U.S. adult population. Second, this measure counts part-time employment as equivalent to full-time employment and therefore ignores underemployment.

Bronars’ constructs an FTE employment rate index for various age groups to capture changing social practices, e.g., the fact that a growing number of young people enroll in postsecondary education:

FTE employment rates of adults under age 25 have trended down for years as young adults have shifted from work to school. Nonetheless the current FTE employment rate is 2.8% below its projected trend representing a shortfall of about 1.1 million full-time jobs.

In his more recent post, Bronars observes that much of the employment shortfall in the current recovery can be attributed to older workers:

One of the most important observations that I make in my post is that over 40% of the shortfall in full-time employment is among adults age 55+. To non-labor economists this observation may seem surprising because FTE employment rates for adults age 55+ remained steady since 2008. But employment rates were trending up for this group quite steadily prior to the recession …

If the labor market recovery was typical of most postwar recoveries employment rates for the age 55+ cohort would still be increasing. The fact that employment rates have remained constant since 2008 is very disappointing. The natural employment rate for this age cohort is trending up for several reasons: (I) the Social Security retirement age for this age group is now 67 rather than 65 so more seniors will remain employed, (2) increases in life expectancy, (3) the aging of the baby boom cohort means that a higher fraction of the age 55+ group are in the 55-59 and 60-64 age categories that have always displayed higher employment rates, and (4) women now reaching age 55 have much greater labor force attachment throughout their careers than earlier cohorts of women. [Emphasis added]

This seems like an opportune time to implement one of Andrew Bigg’s more politically attractive Social Security reform proposals, i.e., the elimination of the Social Security payroll tax on older workers: 

[R]eformers should eliminate the payroll tax on older workers. Those who delay their retirement continue to pay Social Security taxes but receive almost no additional benefits in return, giving older Americans further reason to quit the work force early. Eliminating the 12.4% Social Security payroll tax for all individuals aged 62 and older would get rid of this disincentive while encouraging individuals to remain in the work force and also making older workers more attractive to employers (since employers pay half of workers’ payroll taxes). Such a reform would certainly reduce Social Security revenues, of course, but it would offset some of that reduction by increasing other government revenue. Near-retirees are particularly sensitive to tax rates, since they have the option of retiring if the incentives to continue working aren’t sufficiently attractive. Economist Eric French of the Federal Reserve Bank of Chicago projects that a 10% increase in after-tax wages beginning at age 62 would raise overall labor supply by 1.1%, which would raise federal income-tax and Medicare-tax revenue enough to offset roughly three-quarters of the static revenue loss to the government. If increased state income-tax revenues were included, the payroll-tax cut would essentially be self-financing. Thus, while eliminating the payroll tax for older workers would come at little net cost to the budget, the gains to individuals and the economy could be substantial. [Emphasis added]

Eliminating the Social Security payroll tax on older workers would not address the underlying weakness of the labor market, but it might have a number of salutary benefits, e.g., by extending the working life of near-retirees, it might keep them healthier, thus reducing medical expenditures and improving quality of life. 


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